How To Succeed At Succession Planning In Family Businesses

A recent Wall Street Journal report stated that Bernard Arnault, 74, chairman and CEO of Louis Vuitton or LVMH and currently the world's second richest man, meets his five children once a month at the group headquarters. Always, over lunch, Arnault discusses strategy and asks for advice on various issues pertaining to the group from his children—Delphine, Antoine, Frederic, Alexandre, and Jean. In effect, the WSJ report suggests that the patriarch, whose businesses boast uber brands like Louis Vuitton, Bulgari, Tiffany, Sephora, TAG Heuer and Dom Perignon champagne, is auditioning his children on a continuous basis to decide as to who will succeed him.

Succession planning in family businesses in India is relatively new and, importantly, challenging to implement. Traditionally, Indian family businesses followed the practice of the eldest son succeeding the patriarch. But that is not always so today. There are other changes as well. What, then, are the challenges and best practices of succession planning in Indian family businesses?  

Difficulties in succession planning arise partly because the issue is perceived through different prisms by three relevant stakeholders of the patriarch (rarely the matriarch), the next generation or the inheritor and the organisation as a whole.

For the patriarch, handing over the reigns is often an emotional decision and process rather than a rational one. Emotional, because, if he is from the first generation for example, he would have toiled hard for about 25 to 30 years to bring the group to where it was. There would also sometimes be a feeling that not all of his children are worthy enough to step into his shoes.  

At a family business conference of the Indian School of Business earlier this year, Sanjiv Bajaj, the youngest son of the late Rahul Bajaj, recounted an anecdote. When he and his brother Rajiv Bajaj were young, once when their mother, Rupa Bajaj was serving them a not-too-tasty porridge and the children were reluctant to have it, she said that unless they have it every day, they will not have enough stamina when they grow up to lead their family business. Senior Bajaj, who was within ear shot, retorted loudly in his characteristic style that just by having stamina they will not inherit the leadership of the company; rather, they have to prepare, work hard and earn it. He emphasised that it would not be automatic.

Says Kochi-based senior family business adviser MSA Kumar, “Many of the younger generation in family businesses have an entitlement mindset that because they are born in the family, they would naturally inherit the mantle of leadership. It should also be ingrained in the next generation that the eldest son will not naturally succeed the father. Leadership should be based on meritocracy coupled with assessments through performance appraisal, feedback and grooming.” Puneet Dalmia at cement major Dalmia Bharat, though not the eldest among the cousins and siblings, was selected to lead the group based on his competencies. His subsequent leadership years and strong group financials have demonstrated that it was the right decision. 

Perspectives from the next generation are multifold and differ from the seniors. The eldest son would naturally have a sense of entitlement because of the customs and traditions in the Hindu family system. Further, with longevity of life and the senior generation continuing well into their seventies, the next generation starts feeling restless. With the business landscape changing dramatically in the last decade, the younger generation is also restless with new ideas and wanting to explore emerging opportunities.   

The organisation, as a whole, also has to be prepared for the planned transition. Typically, there is a set of senior professional leadership that is loyal to the patriarch. They would be uncomfortable with the incoming of a younger generation.

That is why succession planning should not be a quick, one-shot affair. “It needs to be properly thought through, planned and phased out. The whole process should start at least two years prior to the actual leadership change. This way the patriarch, the inheritor and the organisation will be fully ready,” said Kumar.

One way that many family businesses have tried to do this is to incorporate the transition in all its details into a family constitution. The Bengaluru-based Evolve Back Resorts (formerly Orange County Resorts) has fine-tuned this process well.

An important aspect to consider well in advance before the leadership change is the role of the patriarch who will step down. For, quite often it has happened that, even after giving up the reigns he is unwilling to let go or tries to manage the affairs of the firm remotely. That is a recipe for disaster. In fact, experts suggest that there should even be a physical distancing between the person who has stepped down and the inheritor. It would be best if the patriarch who has retired comes rarely to office and instead involves himself with other organisations like industry associations or be active in philanthropy. 

When BVR Mohan Reddy, who founded the global technology firm Cyient (originally Infotech Enterprises), stepped down as the executive chairman in 2021 after 30 years at the helm, he ensured an arm’s length distance with the company. He would come only once a week on Mondays to office and have an informal ‘chai pe charcha’ with this successor. In the initial days after stepping down, Reddy also had a buddy or a mentor to counsel him.

Having an active board of directors and even a strong advisory board, which can counsel and guide both the retired patriarch and the successor, would also be a good practice. Clearly, in today’s age when unruly family divisions take their toll on businesses, well-planned succession will help create more lasting and stronger family businesses.

George Skaria is the former Editor of Indian Management and Asian Management Review.

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.